JCL Blog

Michael Lewis just put out another book about Wall Street - the topic that originally made him famous when he wrote Liars Poker in the '80s. Readers of this blog know that I am already a fan (see Moneyball and The Home Game) and The Big Short does not disappoint.

Knowing that I am not going to get another new work by this author for a year or so, I did my best to pace myself, but it was hopeless and three days later I was done. Even though I am familiar with the story (see Too Big to Fail) I was not tempted even once to skim.

In a strange way the book restored some of my confidence in our free market system because the people that the author chooses to follow in the book are small time outsiders who were able to figure out very early what was going to happen in the market for mortgage bonds. Simultaneously however, Lewis reinforced my view that the Wall Street game is rigged and only a fools expose their money to parasites like Goldman Sachs.

Here are my take aways:

The people at Goldman Sachs really are the best and the brightest -- and they really are amoral. They invented the complex instruments that caused the problem, made the fees, and promptly offloaded the risks to others -- like AIG. They did their very best to conceal the truth by influencing everyone from the ratings agencies to the government -- which permitted the problem to get very big before it blew up. I can't help but wonder how many other times the economy got wobbly and was prevented from behaving like a self correcting rational market because Goldman and others like them were madly pulling all of the levers to maximize their winnings.

Our government has no idea what to do about it. Clearly the regulators are being deceived and worse yet they don't know it. They were nowhere to be found while Bear Stearns, Lehman Bros, AIG, and others were placing gargantuan bets with other people's money and, amazingly, enough of their own money to blow themselves up. When it came time to assess the situation and decide about TARP there was not a single government official that really knew what was going on.

The author makes an effort to get to a root cause and drills to the Solomon Brothers conversion from a private company to a public company and therefore shifting the risk of their activities away from themselves and to their shareholders. Everyone of John Gutfreund's peers considered it a betrayal at the time, but they all eventually followed suit. Once they had suckered others to bear the risk -- they cranked the compensation models in their own favor and the RTC/Junk Bond blow up, the Long Term Capital Management blow up, the latest melt down, and the next catastrophe were set in motion.

That is right, we have not fixed a thing and just as the insiders are on their way to their next really big payday, the rest of the country is on its way to another "surprise" on Wall Street. If you have a hard time believing this, check out this article in the Guardian about David Tepper. Tepper decided he was not being fairly compensated at Goldman Sachs -- so he started Appaloosa Management that bet big on the government bailout of the banks. His fund is up $4.5 billion and he gets $2.5 billion of it. I wonder what is going to happen when the size of the problems created on Wall Street exceeds the financial capacity of our government to pay the bill. Will we call that financial armageddon?